Arbitrage

1) A trading strategy to profit from market inefficiencies in price differences of a given commodity, either at the same location or at different geographical locations. Grade arbitrage is trading the difference in the price of a commodity in the same location – for example, the difference in the prices of two sweet crudes in northwest Europe. Geographical arbitrage is trading the difference in the price of the same grade in different locations, after adjusting for the cost of transport between the locations. Often grade and geographical arbitrage are combined – in transatlantic arbitrage, for instance, which is trading the price difference between, for example, Brent crude in Europe and West Texas Intermediate (WTI) in the US, this calculation will include the cost-of-carry as well as the cost of the alternative crude in the US.

2) Attempting to profit from differences in price when the same security, currency or commodity is traded on two or more markets.

3) Attempting to benefit from different regulations in different areas of jurisdiction.

* see also regulatory arbitrage

Related Terms

Energy Risk Glossary

Commodity trading and risk management is a subject that is necessarily complicated, and is becoming more so. The Energy Risk Glossary seeks to disentangle and clarify the jargon by providing definitions of commonly used energy and commodity market terms.

These include definitions related to a variety of underlying energy products, as well as technical terms about the many instruments and benchmarks used by energy market participants.

Many of the most recent terms to have been added to our glossary stem from the actions of regulators since the 2008 global financial crisis. The onset of rules, such as the US Dodd-Frank Act and European Market Infrastructure Regulation, has markedly increased the cost and complexity associated with commodity trading. Perhaps they have also increased the need for a handy reference guide such as this.

The glossary is extensively cross-referenced, making for easy and thorough searches. We hope you find the latest edition of the Energy Risk Glossary to be a useful resource.

A quant at Citi has revived debate about the changing nature of the profession (www.risk.net/2417747). The scope is narrower, he claims; the job has been dumbed down, and today's quants are little more than programmers. Is he right?